Inventory Methods Learned In Introductory College Accounting

LIFO,FIFO, and Weighted Average

LIFO,FIFO, and Weighted Average

I am a college student that was assigned to publish an article on items we learned in our introductory college accounting classes. I chose inventory methods because I find it interesting how we are only taught these specific 3 methods when there are so many other methods available. Inventory is extremely important to businesses and how they operate in day to day activates. Inventory is so important in fact that large companies such as Wal-Mart hire outside firms such as Proctor and Gamble to manage their supply chain for them. The inventory methods I will discuss each have their own unique way of tallying inventory, thus creating their owndifferencesand affects to your balance sheet and income statement.

There are many different types of inventory methods used throughout the business world, but there are specifically 3 methods you learn in introductory accounting classes in college. These three inventory methods being last in first out method (LIFO), first in first out method (FIFO), and lastly weighted average. Inventory is made up of fixed assets that are sold or used for production. You find your inventory by taking beginning inventory + net purchases cost of goods sold = ending inventory. These methods largely affect balance sheets, income statements, and cash flows depending on which method is used.

Last In First Out (LIFO)

LIFO or last in first out method happens to be pretty self-explanatory as are all these methods. The last item on your inventory is considered to have been sold first. If a restaurant purchased 500 sodas at 20 cents per unit on Thursday and purchases another 500 sodas at 40 cents per unit on Friday. The 40 cents would be used to calculate the cost of goods sold on the income statement while the 20 cents per unit at 500 units would be used to calculate the inventory at the end of the period on the balance sheet.

First In First Out (FIFO)

FIFO or first in first out method is also exactly how it sounds with the first unit on inventory is counted as the first unit sold. In the restaurant example where there were 500 sodas purchased for 20 cents per unit on Thursday and 500 sodas at 40 cents per unit on Friday. The first units on the inventory would be the ones from Thursday so they would be counted as the first sold. The Thursday inventory of 500 sodas at 20 cents per unit would be counted as being sold first thus being calculated on cost of goods sold and appearing on the income statement. While the Friday inventory of 500 sodas at 40 cents per unit would be calculated to ending inventory thus appearing on the balance sheet.

Weighted Average

Last but not least is weighted average or average cost which is also pretty self-explanatory in name. Weighted average calculates an average of all units during an accounting period. So in the restaurant example where on Thursday 500 sodas were purchased at 20 cents a unit and Friday 500 sodas purchased at 40 cents per unit. The cost of these sodas would be averaged to 30 cents per unit for 1000 units would be used for cost of goods sold and ending inventory. In my opinion weighted average gives you a more accurate inventory number on your income statement and balance sheet.

As you can see depending on what inventory method used, it can greatly affect the outcome of your income statement and balance sheet. There are many inventory methods used in accounting, so what makes accounting departments teach only 3 of them in the introductory level courses? Well for one there is time stringent time restrictions that universities have when teaching there students with only limited time in a college semester. Professors could literally spend a college semester teaching only inventory methods, which would be indeed quite a waste. So education departments pick only a few to teach, so that you may get the idea of some inventory methods and be able to use those and adapt when you go off and become a professional. Knowing these 3 inventory methods will help you greatly in your introductory and higher level accounting classes. Inventory is an important portion of accounting and extremely important in day to day operations of a business. Large corporations will make million dollar decisions based on inventory information alone. Thus it is very important to be accurate yet quick with your work if you do indeed intend on being a professional accountant.

Inventory Methods Learned In Introductory College Accounting

By: Rob Klock

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